An Ad Stock Opportunity You Can Expect to Pop Up

Buy Millennial Media on the dips this summer

They’re annoying. They get in your way. They are pulsing blots on the mobile application landscape as cruel and unwanted as wasps at a picnic.

Of course, I am talking about ads in your favorite mobile applications. No, I don’t want to buy a Kia today, or tomorrow, or ever. Or Anacin. Or a Bud Light. Please, just go away.

But wait. It turns out there is a good reason for those ads to appear. Maybe I don’t mind putting up with them after all. Because it turns out that, increasingly, game makers and content providers are turning away from the 99-cents-per-app or $1.99-per-month subscription models and relying on ads instead to make their fortunes.

And oh man, that is a great development for Millennial Media (NYSE:MM), an emerging growth company whose business is at the throbbing heart of the transition.

Millennial, which just went public in late March, is the largest independent mobile advertising technology firm and the second-largest overall in the world, with offices across the globe including Maryland, London, Singapore, New York, Paris and Chicago.

Paul Palmieri and Chris Brandenburg founded the firm in 2006, and both remain on in integral roles, with Palmieri serving as chief executive and Brandenburg as chief technology officer. Both have extensive prior experience in the advertising technology sector with firms like Advertising.com, which was acquired by AOL (NYSE:AOL), and Verizon Wireless (NYSE:VZ).

Millennial Media’s business focus is twofold: helping app developers and mobile website publishers maximize their advertising revenue while working with advertisers themselves to focus and streamline the ad experience for users.

The firm reaches more than 300 million unique mobile device users, representing 40% penetration in the worldwide smartphone base. More than 30,000 apps utilize its ad technology on over 7,000 different mobile device types.

MYDAS is the complex advertising platform the firm built to allow advertisers to reach users. The system analyzes the operating system, screen size, wireless connection strength and several other factors along with its customer profiling data in real time and delivers the correct ad to the mobile device.

Millennial Media’s customer profiling data has more than 150 categories that allow advertisers to specify customer gender, interests, affluence, geographic location and several other categories. All this gives advertisers the ability to develop highly customizable and specific advertising campaigns with an almost endless amount of tailored variations.

Millennial generates revenue by filling the available real estate of the apps from developers with come-ons. The ad firm keeps around 40% of funds generated and sends the rest to the app developer.

Click to Enlarge Analysts at Morgan Stanley estimate the non-search mobile advertising market to be $3 billion this year, growing to more than $9 billion by 2015. This represents phenomenal growth that’s higher than that of TV, radio, print and desktop Internet advertising.

The company is second only to Google‘s (NASDAQ:GOOG) AdMob platform in mobile advertising revenue, yet combined they only control about 40% of the U.S. market, leading to a huge opportunity for future growth. Combine the huge opportunity with a market that grew 165% in 2011, and it is no surprise interest in this sector is heating up rapidly.

Millennial was able to grow gross profits by 147% and 251% the last two years, while improving margins as it adds to its impressive customer list that includes 23 of the top 25 national advertisers, according to Advertising Age. The company currently has more than 1,200 customers running more than 4,000 different advertising campaigns, and as the mobile device segment continues to explode, expect Millennial Media revenues to follow suit.

So the next time you’re downloading the next great mobile app, there’s a good chance Millennial Media will be powering the ads.

With Google and Apple (NASDAQ:AAPL) its biggest competition, expect this $1 billion firm to start garnering a lot of attention from investors. Shares were initially priced at $13 in late March, shot to $28, and have since settled back to $12.50. Put it on your get list amid big dips over the summer.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.